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Will Gold Suffer After Trade Tensions Ease?

Kitco News

Will Gold Suffer After Trade Tensions Ease?

(Kitco News) - The U.S.-China trade spat will not escalate into a trade war this year, said ABN Amro, adding that gold will suffer as a result.

The key driver for the yellow metal in 2018 has been the U.S. dollar, which is expected to rebound in the coming months as trade tensions ease, ABN Amro’s senior precious metals and diamond analyst Georgette Boele wrote in a report published on Monday.

“For the remainder of the year we expect that trade tensions between the U.S. and China will not escalate into a trade war,” Boele said. “It is likely that the U.S. dollar will recover modestly if trade tensions ease and if the Fed continues to hike interest rates as we expect.”

The relationship between the U.S. dollar and gold has been surprising to some traders this year, according to the Dutch bank.

“Currently, the U.S. dollar has the tendency to weaken in an environment of strong equity markets. Vice versa, it profits when there is weakness in stocks, heightened trade tensions and waves of risk aversion,” Boele explained. “The U.S. dollar and gold prices have a strong negative relationship. As a result, gold has behaved as a risk-on asset.”

To make matters worse, gold is likely to feel the pinch of trade tensions easement more than other precious metals.

“[As] gold prices … come under pressure … silver, palladium and platinum prices will probably see less price weakness than gold,” Boele pointed out.

As trade threats dissipate, investor positioning will be different for each precious metal, the report added.

“Gold, platinum and palladium could see a further squeeze of net-long position. Meanwhile, investors hold a net-short position in silver,” Boele said. “All precious metal prices are below the 200-day moving average. This means that the overall bias is negative. These dynamics will have a different impact on the various precious metals.”

Form a technical perspective, ABN Amro expected for prices to fall below the key $1,300 an ounce level within the coming weeks.

“If speculative long positions are squeezed, prices could even drop temporarily below USD 1,250 per ounce and move into the direction of USD 1,200 per ounce,” Boele said.

But, on a bright side, the bank noted that this is the lowest prices could go this year. “Our end of June is now USD1,275 while our end of September and end of December forecasts remain at USD 1,250 per ounce.”

Gold prices fell below $1,330 an ounce on Monday, but then recovered to above $1,335 later in the afternoon. In Asian trading early on Tuesday, spot gold on edged up, last seen at $1.336.70, up 0.08% on the day.

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